Opportunity zones could bring private investment to distressed areas


A new federal incentive program will soon be available to select communities across Tennessee, an economic development tool that encourages private investors to aid in economic recovery and revitalization.
Added to the U.S. Tax Code under the Tax Cuts and Jobs Act on Dec. 22, 2017, the Internal Revenue Service (IRS) defines opportunity zones as economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.
Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service. The first set of Opportunity Zones were designated on April 9, 2018, in 18 states and have since been expanded to all 50 states, the District of Columbia, and five U.S. territories.
Lamont Price, the TNInvestCo Director with the Tennessee Department of Economic and Community Development (TDECD), informed city officials at the Tennessee Municipal League annual conference in Memphis on ways communities can take advantage of the new program.
“The program was launched as a result of the downturn in the economy between 2008 and 2010,” he said. “There are some communities that haven’t recovered the jobs they lost during the downturn and in fact, are operating at a jobs deficit that dipped even further than that. We have 1.8 million Tennesseans – approximately 26 percent of our population - living in those distressed or at-risk communities. Another problem we face is that Tennessee is lagging behind the national average when it comes to net new business starts.”
One of the reasons contributing to this downturn is the lack of local banks now available to lend to small business startups. Price said one out of every four community banks closed as a result of the recession, and now most of the companies that do lend to new businesses are largely concentrated in New York, California, and Massachusetts. As a result, it can be harder to get investment in local projects.
In order to qualify, Price said projects have to be located within certain predetermined census tracts selected because of their level of economic distress. Approximately 176 low-income census tracts in 75 counties throughout the state qualify for the program. As a result, the zones can vary in size based on the size of their tract and approximately 57 percent of the tracts are located in rural areas. These designations last until Dec. 31, 2028.
Investors can then choose to invest in projects located within these zones through a variety of means. The first allows those who have sold stock to invest the capital gain they made from the sale in an investment zone. The investor then gets a deferral on their capital gains tax.
If the investor continues to invest in the opportunity zone for five years or more then receive an adjusted discount on their capital gains tax when it comes due depending on how long they have kept money in the project. Those who keep an investment for a decade do not have to pay capital gains tax on their capital gains at all.
Funds must be invested within 180 days of the sale or transfer of stock, and there is no penalty for investors who decide to pull their money out of an opportunity zone project early. However, those who pull out will then have to pay taxes on their original investment.
Price said large financial institutions will most likely be looking into opportunity zone investments but that it may be best for communities to look to local sources of wealth from people who already care about the community and are already invested in it to fund projects, especially as they may be willing to invest in smaller projects. Middle income residents who are also looking to invest may also be potential partners in projects.
“These projects can be big projects or they can be small projects,” Price said. “These don’t all have to be $20 million projects. There is no floor on what a qualified opportunity zone project can be. As long as you have capital gains, you can do it. If you have a project that is $200,000 for your community, you can do that.”
Money can be invested in businesses or properties like real estate, active business, housing, healthcare facilities like hospitals, infrastructure, community and public assets, greenfield development, startups, industrial projects, and commercial projects within opportunity zones. Price said there are some limitations.
“The projects have to be tax-law compliant, have a qualified deal structure, and no sin businesses are allowed,” he said. “Sin businesses include sun tan parlors and golf courses. A lot of it comes down to the intent of the business as to what qualifies as a sin business.”
Price said investments can also be made on vacant properties or land that has been vacant for a minimum of five years with no substantial improvements. Leased property can also be used as investments, but it must have been leased after Dec. 31, 2017, and the lease must be at market rate. Price said some exemptions for PILOT programs may be coming down the pipeline.
Additionally, properties that are not completely in an opportunity zone may qualify for projects so long as 50.01 percent of the project is located within the zone.
Moving forward, Price said it is important for communities to begin to develop a project pipeline, begin recruiting local investment, identify potential opportunity zone projects, create a marketing strategy for their projects, and to develop a successful local ecosystem for investment.
Price said the state is working on a database that will allow communities to showcase their projects and connect with investors looking for projects in the state. Additionally, the state is also working to develop a playbook for communities on how to best take advantage of opportunity zones and an investment prospectus for the state to help with marketing projects.
“Use this as another tool in your economic development tool box,” Price said. “This program could have a profound impact in local communities.
For more information on opportunity zones in Tennessee, visit https://www.tn.gov/ecd/opportunity-zones.html.